Dunkin' Donuts Takes On The Egg McMuffin

Apr.10.13 | About: Dunkin' Brands (DNKN)

Well maybe not just yet, but a handful of Dunkin' Donuts (NASDAQ:DNKN) stores in Eastern Massachusetts is test-marketing a new breakfast item consisting of bacon and eggs sandwiched between a sliced sugary glazed donut. While this might sound like an indulgence one would find at a county fair, the caloric content is not that much higher than the McMuffin. McDonald's (NYSE:MCD) egg McMuffin has 300 calories; a Dunkin' Donut sandwich comes in at 360 calories, with 260 of the calories coming from the glazed donut. While DNKN spokesperson claims that the company does not have plans to introduce the product more widely, there may be some sound business sense in its testing a new breakfast product; according to Men's Health magazine, breakfast has accounted for almost 60% of restaurant industry growth.

This is not the first time fattening breakfast or lunch food has found its way between a sliced sugary doughnut. Celebrity chef, Paula Deen, created her Lady's Brunch Burger with a sliced Krispy Kreme (NYSE:KKD) glazed doughnut as the bun. And while these sandwiches sounds amusing and artery-clogging, as an investor, one must realize that there is not just a war on fat and sugar, but a war for the consumers' fast food breakfast dollars. And with DNKN rolling out a national presence, the donut sandwich-- whether or not it makes it out west-- is just one volley in the company's planned media blitz to create name recognition.

This is not the first time DNKN and MCD's have ventured into each other's arenas. In early 2012 MCD's unveiled a new line of freshly baked goods throughout its New England stores, in an effort to compete with Dunkin' Donuts, including cheese danishes, two types of muffins, banana bread, and vanilla scones. And back in 2009 MCD rolled out its McCafes, selling premium coffees at a lower price in efforts to lure away DNKN and Starbucks (NASDAQ:SBUX) customers.

Weldon Spangler, Dunkin donuts Vice president of Operations in U.S. and Canada, commented on what he believes differentiates DNKN from the rest of the field, including MCD and SBUX, is a combination of, "Great value, great speed of service and fantastic breakfast sandwiches." And though the company's restaurants are called Dunkin' Donuts, the senior executives do not consider it a doughnut store; they consider the core business is the beverage business, notably hot and cold coffee drinks. DNKN sells 1.5 billion cups of coffee each year.

Breakfast is not DNKN's only focus. In an effort to expand its lunch menu, earlier this month the company announced it was introducing two new wrap sandwiches-- tuna salad and chicken salad--which will be permanent items on the menu alongside its bakery sandwiches, which include Ham & Cheese, Turkey Cheddar & Bacon, Chicken Salad, and Tuna Salad, all served on a variety of freshly made breads or bagels. Though with less fanfare, the announcement comes on the heels of MCD's rolling out of its own line of wrap sandwiches designed to attract the younger 18 to 32 crowd dubbed "millennials," who are looking for a fresher and healthier alternative to higher caloric fast food products.

DNKN has also changed its management focus from a business that just opens restaurants to a business that focuses on operations as a retail company by having its corporate operations team works directly with franchisees and store managers to help build the business, which includes raising its profit margins closer to 25%. The company is also focusing on building up its name via expanding its media exposure nationally, with the goal of already having strong name recognition when the company opens its first store in California in 2015. DNKN also has lofty expansion goals as it plans to eventually have 15,000 Dunkin' Donut restaurants in the U.S., doubling its current count. The company opened 291 new locations in 2012, and plans to open between 330 and 360 new locations in 2013.

DNKN's main competitor in the doughnut business, Krispy Kreme, is not sitting idly by, as it too plans on expansion in the coming years. Krispy Kreme has a goal of having over 400 restaurants operating in the U.S. by 2017, upping its total number from the current 240. These new stores will, for the most part, be small freestanding factory shops that have the full doughnut-making capability of their larger traditional stores. However, these smaller factory stores, which will be less costly to build, will be designed to simplify the operation, and are designed to generate a higher sales-per-investment ratio. The smaller stores will serve as retail outlets only and not be involved with the company's wholesale distribution to grocers, mass merchants or convenience stores.

DNKN, which also operates more than 6,700 Baskin-Robbins ice cream locations around the world, is a $4.12 billion market cap company. Year-to-date the stock has risen almost 17%. On April 6th Goldman Sachs raised it price target on the stock from $38.00 to $41.00 per share. Eight analysts have rated DNKN with a hold rating, and nine have rated the company a buy, with the consensus target price of $38.00 per share.

On January 1st the company reported quarterly revenue of $161.7 million with earnings of $0.34 per share, beating the consensus estimates of $0.33 per share by $0.01, and beating the same quarter the previous year when the company posted earnings of $0.30 per share. For fiscal 2012 the company reported revenue of $658.18 million and EBIT of $307.16 million, and forecasts fiscal 2013 revenue to grow between 6% and 8%, and adjusted operating income to rise between 10% and 12% on estimated sales of $718.28 million and EBIT of $339.57 million. DNKN closed on Friday April 5th at $38.81 per share.


Though I don't expect to be seeing a glazed doughnut with an egg and bacon on my plate anytime soon, nor do I see this "sandwich" biting into MCD's Egg McMuffin sales, I do see that DNKN has a strong focus on growth and raising its profit margins in the stores. I think as DNKN continues its media exposure its name recognition will attract new customers to sample its wide variety of food products. I see the stock today as a strong hold, and if it dips, a buy. The question is, can DNKN take customers away from Starbucks or MCD, which are already entrenched in territories that DNKN is just now entering? If they can, look for the stock to continue to rise over the years and grow, carving its own name from coast to coast.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.